RBA still open to dollar interventionReserve Bank of Australia Governor Stevens has again said he is open to intervening in financial markets to decrease the value of the Australian dollar and noted the importance of the bank's reserve fund.
The exchange rate has behaved lately more as might be expected in circumstances of easing monetary policy, noting its 13 per cent fall since February, he told the House of Representatives Standing Committee on Economics.
But asked about the possibility of intervening in the currency by selling Australian dollars and buying foreign currency, Governor Stevens said he preferred to remain ambiguous.
He told the committee that he's not ruling out intervening in currency markets.
"If it seems to be appropriate in the market conditions taking (into) account the fundamentals as best that we can judge, then we'd do so," Mr Stevens said.
"I don't really want to set out in advance specific triggers which might induce intervention."
Mr Stevens said it is not appropriate for the Australian dollar to be over 90 US cents at the moment.
"An exchange rate over a dollar or in the 90s (US cents) is unlikely to be a sustainable equilibrium over time," he said in Canberra.
"It wasn't wrong to go there for a time."
Reserve fund boost prudent: Stevens
Mr Stevens said it is important for Australia's financial stability for the central bank to have a reserve fund.
The federal government recently gave the RBA $8.8 billion to bolster its reserves, contributing to the $17 billion blowout in the 2013-14 budget deficit since the September election.
Mr Stevens says the fund is the RBA's principal capital reserve against balance sheet risks.
Half of its assets are domestic and the other half are more risky foreign currency assets.
The reserve fund had been run down in recent years following the rise in the Australian dollar, he said.
The fund needed to be rebuilt at the "earliest possible schedule" so the central bank's balance sheet "remained strong for whatever came down the track in the future".
"Having the Reserve Bank reserve fund at a prudent level is very important," Mr Stevens told the committee.
The RBA board had a "long-run aim" of increasing the fund to $15 billion.
Mr Stevens said he had discussed the reserve fund issue with Joe Hockey during his first meeting with the new treasurer after the election.
Asked by Labor MP Ed Husic whether he made a specific request to Mr Hockey, Mr Stevens said: "I didn't go there saying `could I please have $8.8 billion - sign the cheque now'. That wasn't the nature of the conversation."
Mr Stevens declined to say who suggested the $8.8 billion figure, although he did say Mr Hockey was "very abreast" on the issue of the fund's depletion.
He said it had been a concern to the RBA "all along".
While the bank wasn't close to being insolvent and was able to carry out its functions unimpaired, there was a genuine risk for taxpayers if the fund was depleted.
"It is not a pretend risk... in my opinion it is appropriate to put an amount of capital against that genuine risk," Mr Stevens told the committee.
"But it hasn't meant that we have been unable to conduct monetary policy or do our financial stability matters and no one was suggesting that."
Mr Stevens said he expected the RBA to provide a dividend to the federal government in August 2014.
"My expectation, at this point, would be unless there is a big event that happens in the next seven months, come next August we would be making a dividend to the commonwealth in the normal way," he said.
The RBA didn't pay the government a dividend in 2013, after handing over $500 million in 2012.
Before the $8.8 billion grant, the RBA reserve fund was around $2.5 billion.
Australian economy is better than most: Stevens
The Australian economy has its challenges, but we're better off than most other countries and we're in an enviable economic position some years after the global financial crisis, Governor Stevens said.
That's despite the federal government's revelation yesterday that the 2013-14 federal budget deficit had blown out by $17 billion since the election, he said.
While the economy was currently experiencing below-trend growth, it was still "12 or 13 per cent bigger than it was" before the GFC, Mr Stevens said.
The banking system is stronger now than it was in 2008 and while unemployment is higher, it remains low by historical standards and when compared with many other countries, he said.
"I think we have a record of macro-economic success in that period that, in all immodesty I suppose, many other countries wish they had," Mr Stevens said.
"It's certainly true we have a buildup of government debt and that's a medium-term challenge for us to address but... it isn't actually about a surplus or a deficit in any particular year.
"Even with the debt numbers that have been put out yesterday and the projections, there are a lot of countries who would rather have that set of numbers than the ones they have.
"I think we have problems, we have big challenges, but I'd rather have most of our challenges than the ones I see around the table with governors I sit with a number of times a year."
Borrowing costs not hitting growth: Stevens
Although the RBA is open to lowering interest rates even further, there are "few serious claims" that the cost of borrowing per se is holding back growth, Governor Stevens said.
"On the contrary, monetary policy is supporting higher spending by altering incentives as between spending and saving, and working to create an environment in asset and credit markets that eases the restraints on some sorts of activity," he said.
"In the end, though, firms and individuals have to have the confidence to take advantage of that situation.
"They have to be willing to take a risk - on a new project, a new product, a new market, a new worker.
"Monetary policy can't force spending to occur."
Governor Stevens told the committee that many policies collectively affect business productivity.
"It is hard to escape the feeling that we as a society have tended, for quite a long time now, to go about our decisions on such matters while making the assumption, perhaps without realising it, that solid growth of the economy will simply continue, and that it won't be affected by these other choices of various kinds.
"We are at a moment now when that assumption has to be questioned.
"The path of pro-growth, pro-productivity, confidence-building reforms would mean that the basis for investment and growth in real incomes would improve."
Governor Stevens said that growth would allow consumption to grow without recourse to excessive borrowing and provide a revenue base for governments to provide services and infrastructure to the community.
"The alternative path is a much less attractive one," he said.
Governor Stevens said the central bank expects below-trend growth in GDP to continue for a bit longer, then strengthen over the medium term.
Mining investment has reached its peak, while non-mining investment remains at a low ebb, he said.
Resource sector investment is likely to decline gradually at first, then more quickly thereafter, and to fall considerably over the next few years, he said.
"There is therefore scope for other forms of private demand to grow more quickly, the more so as government spending is scheduled to be subdued," he said.
"Investment in dwellings shows clear signs of a significant increase, and exports of resources will continue to rise strongly."
Governor Stevens said that over the year, fears of a euro area break-up had abated, the United States economy was gradually recovering and the slowdown in China had run its course.
"So the past year can perhaps be labelled as: not quite as good as hoped for, but not as bad as feared," he said.
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